Unconventional Wisdom

Forum: This thread is about investing and what people have been told makes sense to do, which is sometimes referred to as Conventional Wisdom (CW). I would like to challenge three of the fundamental tenants of this so-called conventional wisdom, casting aspersions on them with one hope: that you will challenge them for yourself. Regardless of if you think my arguments have merit or not, if you read this and at least question these ideas which most folks have swallowed hook, line, and sinker, then I will feel the post was of some value. It's your money. Here we go.

CW #1: Invest based on your age. Your age is important to your investment mix. For example: If you are 30 years old, then 70% of your investment assets should be in stocks, and the balance in fixed income assets (bonds), with perhaps a small amount of cash. After all, if the market goes south, you will have that much longer to ride it out, and stocks always go up long term. Right?

Aspersions to CW#1: Wrong! The market does not know how old you are. The market does not care how old you are. It will go up or down regardless of how old you are. If age is to come into play here at all, then question the age of the market itself. How long have we been in this bull market, for example, has some relevance. Do not mix your investments between asset classes based on your age. Mix them according to your own perceptions and research about the markets, as well as your expectations. Consider investing in the markets up until your "sleeping point" - in other words, if you can sleep knowing that you could loose as much as x%, then x% is your maximum. It is true that the stock markets have gone up over the long term, but have you done your homework to define what long term is? No, it isn't 5 years. No, it isn't 10 years. No, it is not even 20 years! Example one: If you had been invested in the 1929 bubble, you would have had to have waited until 1954 to just break even, and that mostly due to dividends, not share price appreciation. The 1929 high for the DOW was 381.17, and it did not get back there until 1954, when it reached the then "lofty" level of 404.39. That's 25 years folks. Can't happen again? Think again. Think about the instability of global markets and the records that the U.S. markets are reaching now. Think about all of the political tensions, the prices of commodities now, the wild and unrelenting expansion of credit, the expansion of the money supply, the rampant speculation using derivatives, and oh yeah, there is also this little computer thing which some folks think may be a bit of a problem - I think it is called Y2K. Want another DOW example. OK. Consider that the DOW peak in 1964 was 891.71. Now, care to hazard a guess at what the peak was 15 years later? It was 897.61, in 1979. Six points higher, 15 years later, with the highest peak between 1964 and 1979 being 1,051.70 in 1973.

CW#2: Buy on dips. This will allow you to get in low and buy more shares too, increasing the value of your holdings over time.

Aspersions to CW#2: Folks who buy on dips are sometimes referred to as dips buying. They have been brainwashed into thinking that this is always a good thing to do, without questioning it. They have learned their lesson well. After all, in 1987 the market crashed, loosing about one third of it's value in a two week period. Many (if not most) people sold and lost. Others who had the stomach for it, held on to not only recoup their paper losses, but reap huge windfalls later, as markets recovered very quickly. People re-learned their lesson to buy on dips in the shallow 1991 recession, and more recently have watched the markets roar back quickly from both the October 1997 crash and the almost 20% correction of last summer. Yes, they have learned their lesson well indeed. An old adage on Wall Street is that when the majority of people learn a lesson, it is the wrong lesson. So what makes this work or not work is how good you are at sticking to the market as you watch your electronic money vaporize. Buying on dips can work, but it is not for everybody. It is not for most people. I get a kick out of all of these folks who think they are "long term investors", and then check the value of their mutual funds every week, or even every day. They are kidding themselves. They are dips buying and will cash out when they loose enough to get really worried. They will want to cut their losses. What they will actually "succeed" in doing is locking in their losses.

CW#3: Dollar cost averaging is the best thing since sliced bread.

Aspersions to CW#3: Dollar cost averaging is well-intentioned. It can be a great way of investing, but there are two big assumptions. The first is that you will have the composure to sit idly by and patiently wait out crashes, sending your hard earned money flowing into the mutual fund managers funds (and pocketbooks) each month, even if the market continues to slide. The second assumption is that stocks will go up over your investment time horizon; that is they will be higher when you are ready to get out than the period over which you dollar cost averaged into your investment. Have you done your homework? Look to the forerunner of dollar cost averaging for some empirical data. In the 1960's, there was the "contractual plan" idea which is very similar to today's concept of dollar cost averaging. This featured a monthly commitment by an investor over a set period of time (usually 10 years). They were marketed by salespeople with a front-end load of about 8.5%, which had to be paid in its entirety during the first few years. You could wait ten years (or more) to see your "profit", but the fund companies wanted their money much sooner. How instructive. This actually made sense to a lot of folks during the 1960's bull market, 40% to be exact. It was very popular - while the markets were going up. But once markets started going down, and continued going down, folks began pulling out with the exact opposite result of what they originally intended. They ended up buying high and selling low. How many people do you know who invested in a dollar-cost averaging type idea since the 1960's and continued with it during (and through) the bear years to come out in the 1980's and 1990's as multi-millionaires? The lesson here is don't blindly commit your hard earned money without thought to market conditions. Consider the market itself that you are investing in, and as many things as possible that can affect that market.

In summary, always question assumptions. Develop your own "unconventional wisdom." As I stated at the beginning of this (now very long) post, my hope is that you will at least stop and question these tenants of CW that have been repeated over and over again until people just believe them as truth and act on auto-pilot. As a parting thought, I am sometimes asked after we have a drop in the market: Where did the money go? My answer is that it doesn't "go" anywhere. It simply ceases to exist. Since it is electronic money and not cash, it just evaporates into thin digital air. If you still want to think of it "going" somewhere, then think of it as going to money heaven - just make sure it isn't your money though.

Answers

Rob,
I do not disagree with 99% of what you write on financial topics.
Neither do I admit that I am financially "savvy" when it comes to the
markets. I do question with all do respect to you the statement about
lost money in the market goes to "money heaven". Can you elaborate on
this "money heaven" It seems to me, and again I am probably wrong,
that if I buy a share of Amazon.com stock for say $10.00 fom someone
who paid $5.00 for that same share then he has made $5.00 profit. That
same share is sold by myself for $15.00 in which I profitted $5.00.
And on and on until it is selling for $150.00 a share after splitting
three times. Basically when the Ponzi scheme ends and the stock drops
to $5.00 again, I beleive someone has that money. Its the ones who got
out of the scheme before the whole thing crumbles that has the money.
If I am wrong, can you explain? By the way when do you think will be a
good time to jump in and short Amazon.com. After all with 50 million
shares circulating through Wall Street at a value of around $180.00
after splitting three times and total gross revenues last year of $500
million the "Ponzi or Pymamid Scheme" has to crumble sooner or later
on this specific stock.
Mike

"And on and on until it is selling for $150.00 a share after splitting three times. Basically when the Ponzi scheme ends and the stock drops to $5.00 again, I beleive someone has that money"

flierdude: I have a thick hide, so feel free to disagree anytime. You are correct in that people made money all the way up (assuming they cashed in) and someone still has that $5.00 - What I was specifically referring to was when you are holding something worth say $100 today, and it is less, say $75 tomorrow. The value has dropped by $25 overnight. People ask me where that $25 went... it is that $25 that doesn't exist any longer. Hope that this example clears up what it was that I was trying to say.

Regarding Amazon.con, (sic) or any other net stock, we are in uncharted territory with p/e multiples and the sector is manic and absurd, so you are right to be thinking "short". As to when, I haven't a clue. My only advice if you play that game is to play with what you won't miss if you loose, or you can go to Las Vegas.

No Spam Please: Clutter? Guess you did not think much of the post. As far as off-topic, money is never off topic, IMHO, and I have been seeing posts from others recently that discussed money-related questions, sometimes not in a Y2K context, so I thought of doing this. It is not specific to Y2K, so in that respect you are right, but if folks get hurt in the markets (which I truly think is an increasingly strong possibility) and don't have any money because of following the "conventional wisdom", how are they going to be able to prepare for Y2K or anything else? Perhaps I am greatly overestimating the number of folks that clink to some of these "conventional wisdom" ideas without hearing any contrary opinion. I have not seen any of the opinions which I assert expressed on the forum, though I may have missed them in previous posts. It is for the lurkers too, don't forget, and who knows what they think. If only one of them reads what is here and starts to seriously question what they have been being told,
it will have been worth the bandwidth.

I thought this post would be a contribution, not clutter. Perhaps, as you have indicated, I am wrong.

I have a book that profiles great investors, forget the title. Warren
Buffett, John Templeton, etc. Generally when stocks seem unduly
expensive they stand aside, keep much of their money in cash until
things settle down. Of course, we are in unusual times with the
building of entirely new infrastructures, but people here know what
that's worth right now...

It sure is tempting to try to short the
market just before the crash, but I've got this uncomfortable feeling
that people are going to be in denial right up to December or so. I
think I've got just enough money if I scrimp to complete my basic
preps, so I'm disinclined to gamble.

So am I Shimrod. The main point of this post was to have people think twice before they follow all of the "conventional wisdom." Many are sitting on hefty paper profits but not preparing for Y2K .... yet. They will, when they finally get it, and will need money at that time. Will the markets continue to accomdate them? Will their profits still be there when they realize they need money for Y2K, or will the profits have gone to money heaven? No one can what markets will do for sure. But we know that Y2K is coming for sure.

Dont even count on your money market funds being there. Wide scale
bankruptcies can produce serious erosion of "par value". And of
course you need banks to have anything, or to redeem anything. For
thi y2k happening, there is NO guaranteed and certain investment.

Dave: I agree with your point about there being no absolutely safe investment. Sad, but true, and
I posted this opinion on other threads over the months. One other thing that I am fond of saying is that we should be thinking about the return OF our money, not the return On it.

Watcher: Yeah, I got the words mixed - Duh. I am glad you found the post informative. Sometimes it seems that we post what we think will be something that others will find informative or stimulating only to get a very few answers. This thread is an example. - So, thank you - I guess this post was worth the time it took to do after all.

I thought that since there is now more general interest on the Forum
about investing and financial market activity, compared to when this
was originally posted, it would be a good time to send it topside.

Feel free to put in two cents about the so-called conventional
wisdom. There are areas ripe for discussion, more aspersions to be
cast, and also exploring if/when conventional wisdom is indeed wise.
Perhaps you have your own "unconventional wisdom" to discuss.

Hi Stan. I would say the stock market continues to be dagerously
volatile and overvalued by any historical measure you care to name.
Take p/e ratios for example. The historical average is between 11 and
14. Just prior to the crash in 1929 it was around 22. Today it is
around 32. Over the last three years, 26 stocks in the NASDAQ have
accounted for 90% of the gain, and 24 of these stocks have zero
earnings. It is absurd. Look at price to book ratio just as
absurd. Or dividend yeild nearly non-existent. Some folks have said
that none of the historical measures apply anymore - that "this time
it's different." I disagree.

IMHO, a lot of people may be hurt by blindly following conventional
wisdom, especially since I believe we are living in interesting,
unconventional times. I dont care if folks disagree with my
opinions, all I am trying to do is encourage people to think for
themselves and formulate their own, rather than investing by sound-
bite. I know, I am asking a lot.

BTW, I sent you a second email aswe discussed but haven't heard back
from you so I still do not know why you originallly asked for it.